Referendum Battle Risks Greek Government Collapse: Analyst

CNBC.com

Thursday, 3 Nov 2011 | 5:28 AM ETCNBC.com

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Tensions between Greek Prime Minister George Papandreou and Finance Minister Evangelos Venizelos are increasing the risk of a Greek government collapse, after Europe and the International Monetary Fund (IMF) warned the debt-laden country Wednesday that it will cut off its aid flow until a planned referendum is resolved.

Photo: Louis Gouliamaki | AFP | Getty Images

Evangelos Venizelos

Venizelos is opposed to his prime minister's decision to call a referendum on the October 26th agreement on restructuring Greek debt, according to CNBC sources in the Greek government.

He is eager to make sure that Greece stays within the euro zone.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have warned Papandreou that he will not get another cent of aid until the situation over the referendum is resolved.

Venizelos, who was treated for stomach pains in hospital on Wednesday, returned home from the G20 summit in Cannes last night with Papandreou, and the flight home saw disagreements over the referendum flare up, according to reports in the Greek media.

The Greek prime minister will chair a meeting of ministers at 10 GMT today to discuss the growing crisis.

The finance minister described his trip to Cannes as a "national duty."

The market has been aware of the rift between Venizelos and Papandreou for a long time.

"The finance minister has long been in favor of a strong austerity package, believing that otherwise there is 'no road back in terms of economic growth', and this response is no different,” Adam Myers, a senior market strategist at Crédit Agricole Corporate and Investment Bank told CNBC.com on Thursday.

The main problem, according to Myers, is that no wording has even been decided on a proposed referendum.

A poll on the new euro zone deal published by newspaper To Vima at the weekend suggested that nearly 60 percent of Greeks viewed the deal as negative or probably negative, because they are worried about losing national sovereignty.

"Any potential delay in Greek funding has to be of serious concern to markets globally, and that’s what we’re seeing as the markets open this morning,” said Myers.

“Papandreou took not just the European partners but all his internal partners by surprise. There is rivalry within his own party, but it took some time for everyone to react. Now we see that nobody is prepared to give in,” Christian Schulz, a senior economist at Berenberg told CNBC.com.

“Even his (Papandreou's) “political friends” are turning away from him. At this point, it looks very difficult for him to get his referendum. He might be forced to resign,” said Schulz, who believes the situation can still be resolved.

“Greece is a small country. The Greek problem can be contained," he added.

"It’s all about stopping contagion from spreading to Italy and that requires swift implementation of the October 26 agreement. On the other hand, the Greek referendum could set precedent for other countries. So there may be other governments who want to reassure themselves of their voters’ support, which could throw the whole process into doubt.”